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Deal or no deal? How Foxconn-Sharp benefit from reconciliation

Posted: 10 Mar 2016 ?? ?Print Version ?Bookmark and Share

Keywords:Foxconn? Hon Hai? Sharp? LTPS? IGZO?

Things haven't been going too well for Sharp Corp. over the years as the company attempts to turn things around. We've been watching the company's tribulations with as much concern as investors.

In August 2012, Sharp announced that in 3Q 2013 it would cut 5,000 jobs, which at that time was about 10% of its workforce. And the company began re-negotiating a bailout package from Taiwan's Hon Hai Precision Industry Co. Ltd (Foxconn). Sharp and Foxconn deal was, however, fraught with disagreements as this analysis shows. And Terry Gou, the billionaire Foxconn founder, pulled out of the capital tie-up and strategic partnership with Sharp that year.

Sharp quickly took some hard decisions, announcing announcing a voluntary retirement programme, followed by pay and bonus cuts for managers, which backfired on it in November when the company received 2,960 applications for retirement, well over its initial estimate of 2,000. To make matters worse, the company was running out of ways in November to keep itself afloat with an expected annual loss of about $5.6 billion, up from its initial estimate of $3.10 billion in August.

By early March 2013, however, things started to look up when Sharp Corp. announced that it had agreed to receive capital investment of about $111 million from Samsung Electronics, which would not only grant Samsung a 3.08% stake at the time but also establish Samsung as Sharp's fifth largest shareholder, ahead of Qualcomm. The same year also saw some expansion in Indonesia.

Eric Chiou

Chiou: Sharp is one of the few panel makers that have LPTS, IGZO and OLED under one roof.

Fast-forward to today, and we have Sharp and Foxconn again struggling to do a deal that is expected to significantly benefit both companies. Just last week, Reuters reported that Foxconn's takeover bid for Sharp almost fell through due to miscommunication and, as the news agency put it, "simmering distrust."

According to Reuters, a list of contingent liabilities prepared by Sharp and totalling around ?300 billion ($2.66 billion) was communicated to Foxconn as a goodwill gesturethose liabilities did not require disclosure. When Foxconn asked for further details, Sharp wasn't forthcoming. The deal fell amidst a fair amount of executive drama that included Guo shouting at his team for not themselves finding those liabilities. But all is not lost yet for an estimated $6 billion deal. The companies are meeting again and Foxconn may yet buy a stake in Sharp.

"For Foxconn, the main issue is how much the contingent liabilities would add to the cost of acquisition," said Eric Chiou, senior research director at TrendForce Corp., a Taiwan-based market research company. "The deal is an extremely rare opportunity for both Sharp and Foxconn since the former is unlikely to get a better offer and the latter cannot find another target that can provide the same kind of advantages. On other hand, business is business, and Foxconn needs time to review the costs and benefits of this transaction as well as evaluating its own financial situation."

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